Difference Between Business Credit Score vs. Personal Credit Score

Do you know, like every person is given a credit score based on their credit history, businesses too are given a credit score based on their credit-based transactions. 

You should not mix between the two, as they are not linked to each other. Building a business credit score is completely different from a personal credit score. 

Let’s understand both types of credit scores and when personal credit score influences approval of business loans.

Business vs Personal Credit Score

A credit score reveals a lot about individuals and businesses. These days, it is increasingly being referred to for many purposes other than loan sanction. In India, the credit score is computed and maintained by 6 major credit bureaus, the biggest being TransUnion CIBIL. The credit score provided by this credit bureau is often referred to as the CIBIL score.

What is a Personal Credit Score?

A personal credit score is a three-digit number ranging from 300-900 that represents your credit worthiness. The closer the score is to 900, the better your credit worthiness. A score below 600 is considered poor and such individuals are usually not accepted for loans by most lenders.

Reputed lenders often consider borrowers having a credit score of 700 and above for unsecured loans. The credit score is built based on the borrower’s past credit transactions and behavior. Five factors that impact personal credit score include:

1. The amount you owe Vs your income
2. Credit utilization (how much loan you have taken out of the maximum limit you have)
3. Repayment history
4. Credit history length
5. Credit mix
6. New credit you apply for

Of all the factors, the repayment history and the amount you owe have 35% and 30% weightage on your credit score. 

Therefore, if the credit score is low or below the minimum required criteria, it is advised to make repayments on time and pay off all the outstanding dues immediately. 

Must Read: How a Personal Loan can Improve Your Credit Score?

What is a Business Credit Score?

A business credit score is used to evaluate the credit worthiness of a business. However, the computation process and the factors that impact credit score are entirely different from personal credit score. The factors that impact business credit score are:

1. Number of years in business
2. New credit line opened
3. Lines of credit applied for in the last 9 months
4. On-time payment history
5. Collections and lien of past 7 years

Not just for applying for new credit, a business credit score is also useful for conducting business smoothly. For instance, a supplier of raw material/vendor always looks at the business credit score before signing the supply agreement with any business. A good business credit score helps to negotiate better deals with vendors and higher credit periods. Sometimes, business credit score is also referred to as credit rating wherein the bureau assigns the company a number between 1 and 10 (10 being highest) to indicate the business’s creditworthiness based on the above mentioned factors.

In case a business has a low credit score, it is advised to make payments of all business bills on time, aim for lower credit balances, avoid canceling old business credit accounts, and keep business debt levels low. 

When is a Personal Credit Score Required in Business Loan Approvals?

Usually, the personal credit score and business credit score are linked with each other. However, lender prefers to check the personal credit score of the business owner’s mostly for the following two cases:

• When it is a small-sized business like a business falls under the MSME category,
• And, when the business is new and doesn’t have a lengthy credit history to refer to.
• In cases of sole proprietorship and self employed professionals who have their own business.

Therefore, if you have a small business or are planning to start a new one, always keep a check on your credit score. 

Must Read: How to Read CIBIL Report?

Improving Your Loan Eligibility It is a well-known fact that having a good credit score increases your loan eligibility, but it’s not the only thing lenders look for while approving a loan application. The factors that impact your loan eligibility include:

1. Lower Debt-to-Income Ratio

The loan eligibility also depends on your loan repayment capacity. For instance, if the debt-to-income ratio is closer to or higher than 50% of your gross income, it impacts your credit worthiness negatively, and could render you ineligible for further loans / lines of credit. 

Therefore, it is suggested to use the personal loan calculator or business loan calculator to know the EMI that you can afford before applying for a loan. If your total EMI to income percentage, including the EMI for the new loan, is coming under 30%, it increases your loan eligibility, and thereby the possibility of getting approved for a loan. Also, you can negotiate better terms and conditions of the loan, like a lower business loan interest rate. 

2. Documentation

Complete documentation is key to quick approval of a loan application. Incomplete or lack of any documents can impact your loan eligibility or also result in a higher interest rate. 

For instance, you can check the documents required for personal loan on the lender’s website to know the documents required. Alternatively, you can contact the lender to know the battery of documents required for quick approval of the loan application. 

Conclusion

For individuals and businesses, maintaining a good credit score is very important as it impacts several transactions other than loan eligibility. Also, a good personal credit score can help you to raise a business loan in case the business credit score doesn’t meet the required threshold.